Ladybird Deeds in Michigan

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There are many ways to transfer real estate to your loved ones after your death. In Michigan, one of your options is a ladybird deed, sometimes written as “Lady Bird Deed.” The legal name for a ladybird deed is “enhanced life estate.” Whatever you call it and however you write it, this estate planning tool can offer a number of advantages (and a few pitfalls for the unwary). 

What is a Ladybird Deed?

To understand what a ladybird deed is, let’s unpack its alternate name, “enhanced life estate.” An ordinary (non-enhanced) life estate is a form of joint ownership of real estate created with a deed. The “life tenant” has the right to live in and use the home during their lifetime. The “remainder beneficiary” has an ownership interest in the property, but cannot take possession of it until the life tenant’s death. The life tenant cannot sell or mortgage the property during their life without the permission of the remainderman. At the life tenant’s death, the property passes to the remainder beneficiary without having to go through probate.

An enhanced life estate, or ladybird deed, is similar, except that there are no restrictions on the life tenant’s ability to transfer or mortgage the property. If the life tenant chooses to sell the property, that extinguishes the remainder beneficiary’s property rights. However, if the life tenant does not sell or convey the property during their lifetime, it will pass to the remainder beneficiary on their death just as with an ordinary life estate. This transfer is automatic and takes place outside of the probate process. 

Probate Avoidance and Other Advantages of Ladybird Deeds

As you have already read, one of the primary advantages of a ladybird deed is that it avoids probate. On the life tenant’s death, the remainder beneficiary automatically has ownership of the property, without court intervention. 

Other advantages of ladybird deeds include: 

Preserve Medicaid Eligibility

If you ever need nursing home care, you cannot qualify Medicaid benefits to help pay for it unless you have relatively few assets. Furthermore, there is a five-year “look back” period; if you transfer assets, including your home, to someone else in that time frame for less than fair market value, it could affect your Medicaid eligibility. However, a ladybird deed is not considered a “transfer” for purposes of Medicaid eligibility, so it will not affect your ability to qualify for benefits.

Prevent Medicaid Estate Recovery

If a state pays out Medicaid benefits for an individual’s long-term care, federal (and state) law allows the state to recoup funds from that individual’s probate estate assets after their death. This is called “Medicaid estate recovery.” However, property subject to a ladybird deed does not count as part of the life tenant’s probate estate, and so is not subject to Medicaid estate recovery after their death.

Flexibility and Control During Your Lifetime

An ordinary life estate imposes restrictions on what the life tenant can do with the property. Since there are no such restrictions with a ladybird deed, a life tenant can do anything they wish with the property that they could do if the property were in their sole name: sell it, mortgage it, improve it, or give it away. A life tenant can also change remainder beneficiaries or revoke the ladybird deed altogether without anyone else’s permission.

Creditor Protection for Beneficiaries

Your remainder beneficiaries’ creditors cannot reach property subject to a ladybird deed during your lifetime, because the remainder beneficiaries do not have a right to the property until you die, and you have the ability to extinguish that right by selling the property or changing beneficiaries. If you believe one of your remainder beneficiaries may have creditor troubles that could result in them losing the property, you can simply remove them as remainder beneficiary and name someone else in their place. 

Tax Benefits 

Unlike giving your family members a present interest in your home by making them joint owners, with a ladybird deed, they have no present interest during your lifetime. Instead, they will get a “step up in basis” of the property at your death. That will help them minimize taxable capital gains if they sell the property. 

Low Cost

Finally, a ladybird deed is a relatively low-cost option for arranging for the transfer of property at the death of the life tenant.

Disadvantages of a Ladybird Deed 

Ladybird deeds offer many benefits, but they are not the best estate planning tool for everyone. 

Available Only in Five States

Michigan is only one of five states that offer ladybird deeds (the others are Florida, Texas, Vermont, and West Virginia). If you are transferring property in one of these states, there is no problem. In other states, however, you will need to select a different way to transfer your real property.

May Pose Issues for Multiple Remainder Beneficiaries

If you have multiple children or others you want to name as remainder beneficiaries, there could be potential issues when they inherit the house upon your death. What if multiple beneficiaries want to use the property? What if some want to keep it and some want to sell? How will responsibility for maintenance and expenses be allocated? Failing to answer these questions in advance can lead to conflict and expense.

Can Cause Problems for Recipients of Government Benefits

If you have a family member who is disabled or has special needs and is dependent on means-tested government benefits, inheriting property outright through a ladybird deed could put them over the asset limit for their benefit program. That could cause them to lose eligibility.

An Alternative to Ladybird Deeds in Michigan

Depending on your circumstances, various types of trusts may be better choices to achieve your estate planning goals. For instance, if you have multiple beneficiaries and want to avoid probate, a revocable living trust would keep the property out of probate and have one decision maker (the trustee) to prevent conflict among beneficiaries. 

Ultimately, whether a ladybird deed, a trust, or some other planning tool is best for you depends on your unique situation and goals. To get guidance customized for your needs, contact Estate Planning & Elder Law Services to schedule a consultation.

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